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CMA Final · Risk Management in Banking and Insurance · Sovereign Risk and Insolvency Risk

Which of the following is generally regarded as a leading indicator of sovereign default risk used by banks when assessing a country's external vulnerability?

The ratio of foreign exchange reserves to short-term external debt is a standard indicator of sovereign vulnerability. It shows whether the country holds enough reserves to meet near-term foreign-currency obligations, so a low ratio signals higher default or transfer risk.

  1. AThe ratio of foreign exchange reserves to short-term external debtCorrect
  2. BThe number of branches of domestic banks in the country
  3. CThe dividend payout ratio of listed companies in the country
  4. DThe share of agriculture in the country's employment

Explanation

Reserves relative to short-term external debt shows whether a country can meet near-term foreign-currency obligations, making it a standard external vulnerability indicator. The other options are not direct measures of a sovereign's ability to service external debt.

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